Accounting 3.

2 Partnerships
Partnership - group of two or more people operating a business to make a profit; a business entity
Partnership agreement-includes;
*Name of partners
*Location, partners capital contribution,
*Responsibilities/duties/rights of partners,
*Insurance (death of a partner),
*Salaries to each partner, how profit /loss to be shared.
Partnership Act 1908-states
*Profit/losses shared equally
*Entitled to 5%interest on loans
*No interest payable on capital

Advantages of a partnership simple and inexpensive to set up, more skills and ideas available,
more capital, shared decision making, shared workload/responsibility/risk

Disadvantages of a partnership - unlimited liability (partners liable for debs of business, could loose
personal assets if go bankrupt), some find it difficult to share decision making, partners death,
dissolves partnership

Tax partnership profits not taxed, profit shared between partners then each partner declares
partnership earnings in personal tax return
Profit Sharing - partners do not always contribute equally to partnership, they could;
*Share profits/losses according to capital contribution (different amounts),
*Share profit even if capital contribution is different,
*Interest may be paid to reflect different contributions (on capital),
*Interest on drawings may be charged, silent partner (doesnt work as much), others receive a
salary
Forming a Partnership two or more people buying existing business, sole proprietorship, amalgamating
into partnership, sole proprietor taking on partner

When a business is purchased, Assets and Liabilities are recorded in purchasers book at prices
agreed upon by buyer and seller

General Journal

DR Bank

CR Capital Contribution

DR Assets

CR Liabilities

DR Vendor

CR Bank (purchase price)

When a business is sold, values of Assets in balance sheet, often no the same as values agreed by
buyer and seller

Inventory - discussion of what is being taken over, condition of stock, agreed purchase price

Accounts Receivable- books of buyer, full dollar value of a/c receivable recorded and allowance for
doubtful debts created for debts that might not be received *Total accounts receivable agreed
value*

Fixed Assets agreed purchase price becomes cost price, any accumulated depreciation from
seller is ignored

Goodwill unidentifiable intangible asset, difference between purchase price and fair value of net
assets

Amalgamating into partnership future partners will negotiate value of each business, share capital that
each partner will have in new partnership. Net assets of each business comprise each partners capital
General Journal

DR Assets

CR Liabilities (partner 1)

DR Assets

CR Liabilities (partner 2)

DR Bank

CR Additional Capital (optional)

Sole Proprietor takes on a new partner

General Journal

DR Assets
DR Bank

CR Liabilities (A and L taken over)

CR Capital (Contribution from new partner)

Net assets = Gross Assets (A-goodwill) Liabilities (L-capital)

Ledger accounts
Profit Distribution Accounts (appropriation account)- profit calculated same way as in Income
Summary Account then CR to Profit Distribution A/C,
*Interest charged of partners drawings CR,
*Salaries and interest on Capital DR
*Balance is divided between partners agreed profit ratios
Capital Account each partner has a separate account (fixed)-amount of capital remains the same, not
reduces by drawings or increased by profit
Current Account (retained profits account) separate accounts CR to show earnings accruing to partner
e.g. share of profits, salary, and interest on capital.
*Drawings is closed, DR to Current Account
*Interest on Drawings is DR to Current Account
*Drawings not recorded in Profit Distribution account since it is a withdrawal of cash or asset not
withdrawal of profit
Chart of accounts Assets 100-199

Revenue 400-499

Liabilities 200-299

Expenses 500-599

Equity 300-399
Interest on Drawings General journal entry prepared to charge any interest on drawings to each
partners current account
*Relevant a/c numbers from chart of a/c shown in FOLIO column
Salaries treated as distribution of profit CR to capital account
Interest on Capital or Current a/c CR to current a/c
*If current a/c has a negative balance, it is DR (instead of earning interest, a/c was charged interest)
Profit Distribution - end of financial year; profit for period closed off from Income Summary A/C to
profit distribution a/c
*Salaries, interest on drawings/capital/current a/c closed off to Profit Distribution A/C
*Any changes such as interest on drawings or a DR balance in Current A/C CR to Profit Distribution A/C
*Profit for each partner is calculated and closed off to each partners current A/C
General Journal

DR Income Summary

CR Profit Distribution

DR Profit Distribution

CR Salary, Interest on Capital/Current

DR Profit Distribution

CR Current A/C

Loans: partners may make loans to partnership (arms length loans), rate is comparable to interest
charged by other institutions
*Interest paid is closed off to Income Summary A/C
Financial Reports for a Partnership - addition to usual income statement/balance sheet, also
includes

*Profit distribution A/C or statement

*Partners current A/C or summary
*Balances of both current A/C and Capital in equity section
Statement of Current A/C same as ledger A/C but often a Statement of Partners current A/C is
presented instead